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Monday, January 11, 2010

The End of Insurance

A key insurance concept is the need for a large, diversified pool of policyholders so that the insurance company can predict the pool's catastrophic events, and so that such events will be rare. Any concentration of risk in the insurance pool will increase premiums, given the negative impact of those excess payouts on the insurance company's bottom line. Obama and Reid have produced a bill that turns this insurance concept on its head by i) preventing underwriting based on medical risk and ii) requiring citizens (and employers) to purchase insurance or pay a fee. This combination guarantees an adverse selection problem whereby healthy people will pay the cheaper fee until sick and in need of insurance, whereupon they will enroll for non-deniable insurance. Risk pools will become sick pools, and insurance will become a pass-through vehicle for the cost of sick policyholders. The benefit of healthy participants, formerly shared by all policyholders, will be eliminated.

Risk-sharing is another key insurance concept. The policyholder and the insurer share risks and costs, but in exchange, the policyholder is mostly or fully protected against catastrophic economic loss (a home burning down, death, or expensive illness). When the policyholder retains non-catastrophic but more frequent expenses, the cost of the insurance (the premium) is reduced because the insurance company need charge less to make the same shareholder return. Obama and Reid have produced a bill that must raise policyholder premiums because it increases insurance company expenses by i) taxing drugs, devices, and policies; ii) eliminating "unreasonable" annual or lifetime limits on insurance company payouts; and iii) establishing maximum out-of-pocket limits for policyholders.Because every liberal Democratic policy must be rooted in class envy, Barack Obama has vilified the health insurance companies. His lynch-mob sentiment is again defied by facts -- these insurance "robber barons" are not very profitable, nestled somewhere between the 35th- and 86th-most profitable U.S. industries, with a 2-3% return on sales.

Nonetheless, Obama and Reid reassure us that profits will be regulated through state exchanges, cost incurrence mandated, and minimum policy standards established. In other words, health insurance pricing, profits, and products will be governmentally determined. That's a regulated public utility, a framework typically used to address monopolistic situations (not the case with health insurers and potentially unconstitutional). Obama's and Reid's plan not only increases costs as described above, but also by requiring coverage of numerous non-catastrophic ($25-$400) items -- abortion, prescription drugs, lab services, wellness and preventative services, oral care, and vision care. For all these reasons, the bill will dramatically increase insurance company costs with one of only two possible conclusions -- premiums will increase commensurate with costs through the utility model (government-controlled health care), or government-imposed price controls will drive private sector players out of business (government-owned health care).

The Senate bill also funds abortion. If you are confused on that point, that's a desired effect of its complexity. Nothing about states opting in/out or policyholders paying a separate $12 premium for a $400 procedure changes this. The reason Obama favors the Senate over the House version (that directly prohibits federal funding of abortion) is obvious, given his pro-abortion record. A baby's heart begins beating about 20 days, hiccups begin 52 days, and organs function eight weeks after conception.

Minority babies have been disproportionately affected because most abortion facilities target lower-income mothers unaware of pro-life choices and the availability of prenatal care. (Eighty percent of Planned Parenthood locations are in minority neighborhoods.) Since Roe v. Wade, it is estimated that one-third of the black population has been eliminated, killing 13 million black babies totaling 40+% of all abortions despite the fact that only 12% of all U.S. women are black.